UK: New Opportunities To Disclose All To The UK Tax Authorities

New options are now available for individuals and companies with undisclosed UK tax liabilities to regularise their tax affairs on favourable terms. These possibilities are enshrined in memoranda of understanding entered into in February and March 2013 between the UK's HM Revenue and Customs service ("HMRC") and the governments respectively of the Isle of Man ("IOM"), Jersey and Guernsey. To participate in one of the new facilities a person must own or have a beneficial interest in certain kinds of assets ("relevant assets") which are located in the IOM, Jersey or Guernsey, as the case may be. However, the disclosure facilities apply to all previously undisclosed UK tax liabilities, not just those arising from relevant assets located in IOM, Jersey or Guernsey. Favourable terms may apply provided certain additional conditions are satisfied.

Once the disclosure facility ends in 2016 the IOM, Jersey and Guernsey respectively are committed to automatic exchange of detailed tax information with the UK. This could lead to formal investigation of individuals or companies with undisclosed tax liabilities who have not taken advantage of one of the new disclosure facilities.

The new agreements with IOM, Jersey and Guernsey form part of the UK Government's strategy to tackle offshore tax evasion as set out in HMRC's strategy document entitled "No safe havens" published in March 2013.¹ An important strand of the strategy is first, negotiating bilateral agreements with other states for the automatic exchange of information on tax and secondly, providing opportunities for those with unpaid liabilities to make full disclosure to the relevant tax authorities.

The terms of the recent memoranda of understanding ("MOUs") signed with the IOM, Jersey and Guernsey are the same for each territory. They follow the disclosure facility which has been made available under the Liechtenstein Disclosure Facility ("LDF") and the various withholding tax or disclosure options set out in the UK/Swiss agreement. Indeed, as will be explained further below, making disclosure under the LDF might still in appropriate cases, and depending on the circumstances, provide a suitable alternative to proceeding under one of the MOUs.

When are the new disclosure facilities available?

The MOUs provide for the new disclosure facilities to be available from 6 April 2013 to 30 September 2016. Those who intend to participate must apply before 30 September 2016. Financial intermediaries must contact their clients who are known to be within the scope of the applicable MOU ("relevant persons") before 31 December 2013 to make them aware of the facility and they must remind their clients about it during the six months ending on 30 September 2016.

What favourable terms may be available under the new disclosure facilities with the IOM, Jersey and Guernsey?

Period of disclosure: First, where the person in question satisfies the conditions for the favourable terms to apply (as to which see below), HMRC will not seek to recover UK tax (or penalties) for a tax year (or accounting period) ending before a cut off date of 6 April 1999 (for an individual) or 1 April 1999 (for a company). Note though that an individual benefitting from the disclosure facility in, say, 2016 will still have a cut off point of 6 April 1999 ie the cut off date is fixed. However, this cut off date does not apply in respect of tax or penalties relating to an account with a bank (or other financial institution) outside the UK or (as the case may be) IOM, Jersey or Guernsey which was opened through a UK branch or agency of the bank. Here, as well as in relation to certain categories of criminal property, the normal cut off period of 20 years applies.

Mistake: A special provision applies if a mistake was made in a tax return for a tax year (or, in relation to an accounting period) ending more than four years before the beginning of the tax year in which the application for the disclosure facility is made. Thus, provided certain conditions are satisfied any further tax that would have been disclosed as chargeable in the absence of the mistake will be treated as chargeable for a tax year or accounting period ending before the cut off date. The conditions for this treatment to apply are that the error should have resulted in the relevant person failing to report to HMRC an interest in "relevant property" on which he/she would have been liable to UK tax, the error was that of the taxpayer themselves (and not, for example, that of any tax adviser) and HMRC considers that the error was one that a reasonable person would have made. This seems to be intended to apply to individuals who completed tax returns but did not realise that their IOM/Jersey/Guernsey assets could give rise to a UK tax liability. However it seems unlikely to apply where the individual in question took professional advice.

Penalties: A further favourable term potentially available under the new disclosure facilities is that penalties are kept at a specified percentage of the UK tax to which the penalty relates. The penalty rate applicable to tax arising from errors in documents is 20% (compared to 10% under the LDF). In other cases the rate is 10%. However, if the tax arises on income or gains from an offshore ("Category 2") jurisdiction i.e. one which only exchanges information upon request (and not voluntarily) the penalty is 30%. In respect of income or gains relating to an offshore "Category 3" jurisdiction (where there is no exchange of information and no provision for information on request) the penalty is 40% of the tax. The IOM and Guernsey are "Category 1" jurisdictions; Jersey is "Category 2".²

Bespoke service: In some cases a bespoke service may be available under the new MOUs. This would provide a person with the possibility, amongst other things, of making an estimated offer to settle the UK tax liability and to pay by instalments and, where practicable, of determination of liability within nine months of the application. The bespoke service would also offer initial discussions between professional advisers and HMRC on a "no names" basis and a single point of contact within the relevant HMRC team.

Criminal prosecution: It should be noted that there is no amnesty or immunity from criminal investigation under the new disclosure facilities with the IOM, Jersey or Guernsey. This should be contrasted with the LDF where such immunity is available.

Rate of tax: The outstanding tax liability is calculated using normal tax rates and principles. There is no option to use a single rate, as is the case with the LDF.

Who can participate in the new disclosure facilities?

Only "relevant persons" may participate in the new disclosure facilities with IOM, Jersey and Guernsey. Relevant persons are those who, for any part of the period from 6 April 1999 to 31 December 2013, have had a beneficial interest in "relevant property" (meaning, broadly, certain categories of property located in the IOM, Jersey or Guernsey, as the case may be – for further details see below) and have been UK resident. Someone who is not currently a relevant person may become one by acquiring a beneficial interest in "relevant property" and becoming UK resident by 31 December 2013. There is no need to have had an offshore asset on a certain date in the past, or to have a minimum value of assets in the relevant jurisdiction (in contrast to the LDF).

In order to participate in the new disclosure facilities such person furthermore must not have been the subject of an investigation by HMRC which remains open in April 2013. The person must apply to participate after 5 April 2013 and before 30 September 2016, must provide the appropriate level of disclosure to HMRC and must make a financial commitment to pay the overall tax liability or must provide evidence of inability to pay together with a proposal for payment and a payment on account. The taxpayer must pay any further UK tax, interest and penalties notified to him as payable, payment to be made within 30 days of notification or within such other period as is agreed with HMRC.

A person must satisfy further conditions in order to benefit from the favourable terms mentioned above relating to the cut off date for liability, the rate of tax and the special provisions about errors in tax returns. As well as being eligible to participate in the disclosure facility, the person must not have been the subject of an investigation by HMRC that concluded before 6 April 2013 or one that began after that day, must not have participated in or engaged with or been contacted by HMRC in respect of any published disclosure facility before applying to participate in the new disclosure facility and must not be a "relevant person" for the purposes of the UK/Swiss agreement who could authorise disclosure of information to HMRC under that agreement. In this context the interaction with the LDF is not entirely clear because if a person has been contacted by Lichtenstein financial intermediaries in respect of the LDF (as they should have been) arguably they have necessarily "engaged with" the facility, which would seem to rule out disclosure under the MOUs. However the MOUs are currently unclear about this and need to be clarified.

What disclosure is required under the new facilities with IOM, Jersey and Guernsey?

The disclosure required under the facilities relates to all "relevant property" in which the person has had a "beneficial interest" after 5 April 1999. Here "relevant property" includes accounts with a bank or other financial institution in the IOM, Jersey or Guernsey, an annuity contract or cash value insurance contract issued or maintained by a financial institution in the one of those jurisdictions, or a company, partnership, foundation, trust or other fiduciary entity, estate, cash value insurance contract or an annuity contract issued, formed, founded, settled, incorporated, administered or managed in the IOM, Jersey or Guernsey (as the case may be).

For this purpose a person is treated as having a beneficial interest in a company if they have held or controlled shares or voting rights in it or received any of its profits at any time after 6 April 1999. As far as trusts are concerned, an individual is treated as having a beneficial interest if they are the settlor or regarded as the principal beneficiary, or one of the principal beneficiaries, or if they are entitled to any of the trust's income or capital, or has received a distribution or distributions since 6 April 1999 or been provided with a benefit since that date. In short this appears to cover all settlors of trusts, the beneficiaries of fixed interest trusts (such as interest in possession trusts) and, at least potentially, beneficiaries of discretionary trusts. Also covered would be individuals who have received loans, possibly including commercial loans in some cases.

The person in question must also provide such information as HMRC reasonably considers to be necessary to ensure that they pay all UK tax, interest and penalties required under the disclosure facility. Taxpayers must also provide full details of all previously undisclosed UK tax liabilities going back to April 1999, a computation of the overall UK tax liability taking account of the disclosure facility, a declaration that the disclosure is correct and complete and full contact details of any person who has provided professional advice in connection with the disclosure.

Conclusion

All of the new MOUs seem to be on similar lines to the LDF. The significant differences are the lack of immunity from prosecution under the MOUs and the absence of a single rate option for calculating the tax due. The LDF might therefore be preferable in some circumstances. However, other considerations may also be important. People may prefer to proceed under the disclosure agreement with a jurisdiction that they already know, such as the IOM or one of the Channel Islands.

What seems clear in any event is that we are going to see more agreements of this kind between the UK and other jurisdictions.

Footnotes

1 The full title of the strategy document is "No safe havens: Our offshore evasion strategy 2013 and beyond". It is available at http://www.hmrc.gov.uk/budget2013/offshore-strategy.pdf

2 A full list is available at www.hmrc.gov.uk/offshorefunds/territories-categories.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.